FOCUS: Chinese spot cobalt metal buying resumes but large-tonnage, long-term commitments still in check

With the international cobalt metal market falling rapidly between December 2018 and February this year, the arbitrage between the international and Chinese cobalt metal price has gradually turned in favor of Chinese imports.

As a result, Chinese buyers have been considering increasing their shipments of cobalt metal since February with an expectation international cobalt prices are close to bottoming out.

Some Chinese traders and consumers have locked in sizeable spot units to take advantage of appealing international prices, while suppliers outside China have reported receiving an increasing number of inquiries recently.

Optimism for resumed Chinese buying is also believed to be one of the key drivers behind the rebound in the international cobalt price last week.

Fastmarkets assessed the standard-grade cobalt price at $13.75-14.40 per lb on Friday March 29, a 2.2% rally following a marginal uptick midweek to $13.30-14.25 per lb when the blue metal embraced gains for the first time since mid-November last year.

Active inquiries, bids from traders, consumers amid arbitrage profits
The Chinese market started to witness an emerging import profit in February – a rare occurrence in the past.

Taking the low end of Fastmarkets’ standard-grade cobalt price range and Chinese cobalt metal assessments, less 16% China value-added tax, the theoretical import profit for metal into China was $1.06 per lb on March 29 when the standard-grade cobalt benchmark price was $13.75-14.40 per lb and the Chinese cobalt metal price was 255,000-285,000 yuan ($37,996-42,466) per tonne, according to Fastmarkets calculation.

This compares with an import loss of $3.41 per lb two months earlier.

Chinese cobalt metal importers stood to gain as much as $1.55 per lb on March 20.

Buying interest among Chinese import traders and consumers for imported cobalt metal has strengthened since mid-March as a result, with active inquiries and higher bids for seaborne metal as well as for those held in bonded warehouses in China.

“There are many sizeable inquiries from China; everybody is in a buying mood,” a trader said.

“Spot imported metal prices have edged higher, following the increase in buyers bidding,” a second trader said. “I got a bid recently at $14 at cif China basis for 20 tonnes.”

That said, some inquiries have not turned into actual business with some Chinese buyers still cautious, evidenced by reluctance to commit to large-tonnage, long-term contracts.

“Some buyers just sent out inquiries to test the market without any intention to make the purchase,” a third trader said. “They don’t dare to buy anything after all.”

Other market sources told Fastmarkets the reluctance to commit to purchases is because of uncertainty over the arbitrage profit and how long the import window will stay open for.

“The import arbitrage window is open for now. However, the import profits are still limited,” a fourth Chinese trader said.

“In addition, it is not certain how long the positive import arbitrage will last. Therefore, there are still risks in securing profits,” he added.

Battery material feed
After the international price for standard-grade cobalt metal, which can be used to produce battery materials, fell sharply below $14 per lb in early March, the procurement cost gap between cobalt metal and cobalt hydroxide has narrowed quickly.

Cobalt hydroxide, considered a crude cobalt raw material, is a traditional feedstock for Chinese refineries to produce cobalt salts, such as key battery material cobalt sulfate.

“We are looking at the feasibility of importing cobalt metal in briquettes or powder form as the feedstock to produce cobalt sulfate,” a Chinese cobalt salts producer said.

“The international standard-grade cobalt price has fallen quickly recently and if it drops below or close to the cobalt hydroxide price, refineries could partially adopt the metal in the refining process,” he added.

Another factor encouraging Chinese cobalt salts producers to choose cobalt metal is related to ethical sourcing issues in the Democratic Republic of Congo (DRC) where most cobalt hydroxide is produced. Some consumers have faced pressure to protect their supply chains against material produced using child labor, which had been reported extensively in the DRC in the past.

As early as in 2017, some Chinese cobalt refineries had started to use cobalt metal as feed to produce cobalt salts due to the widening price gap between the two materials.

But the price gap has slightly narrowed in the past month. As of March 29, 2019, Fastmarkets’ monthly cobalt hydroxide index min 30% Co, cif China stood at $9.81 per lb, down from $11.05 per lb on February 28. Meanwhile, the twice-monthly payable indicator was assessed at 66-68% against Fastmarkets’ standard-grade cobalt price (low end) on the same day, compared to 65-67% assessed on March 15. 

On paper, this indicates the gap between cobalt metal and cobalt hydroxide has narrowed to $4.23 lb in March from $5.92 per lb in February, taking the monthly average low-end price for Fastmarkets’ standard-grade cobalt assessment.

Although using cobalt metal as feedstock is technically feasible, the majority of market participants do not think Chinese refineries can feed predominantly on cobalt metal, citing the constant pressure on the cobalt hydroxide price as a result of a supply surplus.

“Given the surplus fundamentals for cobalt hydroxide this year, it is quite unlikely to see the cobalt metal price much lower or even a bit lower than the cobalt hydroxide price,” a second Chinese cobalt salts producer said.

Additionally, the supply of cobalt briquettes and cathode is still limited in China, and cobalt powder carries a premium over the standard-grade cobalt metal price, the producer added.

LME cash-settled contract may facilitate Chinese imports
The new cash-settled cobalt contract on the London Metal Exchange has come at the time when Chinese buyers are in need of a hedging tool to offset any potential risks in importing cobalt metal from the international market after the volatility of cobalt prices last year.

“Even for spot procurement, Chinese traders might need to hedge to minimize the risks,” the second trader said.

“For the moment, unless there are good tools for risk management, not all Chinese traders dare to commit to large-tonnage procurement of imported metal even though the arbitrage import window has opened,” a fifth trader said.

The LME launched a cash-settled cobalt contract, settled against Fastmarkets’ benchmark standard-grade cobalt price, on March 11.

“The LME cash-settled cobalt contract solved the lingering difficulty for us to hedge the business,” a sixth trader said, pointing out some Chinese companies might not necessarily be able to hedge on the Wuxi Stainless Steel Exchange, a local Chinese futures platform which provides cobalt trading, due to internal compliance issues.

That said, most market participants acknowledged whether they would rely on the new contract to hedge the risks of physical transactions is dependent on the liquidity of the contract.

The London Metal Exchange launched a new cash-settled cobalt contract, settled against Fastmarkets’ benchmark standard-grade cobalt price, on March 11. Join us for a few web seminar on Monday April 8 as we introduce our cobalt price discovery and the cash-settled contract. Register here.